Rampant speculation in early incarnations of today’s internet giants was tempered soon after the turn of the millennium. A dotcom boom of the late 1990s started to turn sour as the market re-evaluated inflated tech shares.
The March 2000 peak of the Nasdaq was soon followed by a US ruling against Microsoft and then an accounting scandal at Enron corporation, leading to a $40bn shareholders’ lawsuit. “It was just exploding. That was a boom built on the promise of what technology was going to do to our lives, rather than the actual profitability or economic impact,” remembers Mark Mills, Emea regional head for Citi Global Wealth Investments, casting his mind back 20 years.
The bursting of the dotcom bubble saw shares in these companies plummet, but the instincts of those early internet investors were fundamentally correct. Technology was going to change the world, and the survivors of those early days are now the biggest companies in the world.
“Your Amazons and the like were just small players back then,” says Mr Mills. “People lost their shirts off the back of that, but there were some long lasting seeds of impact that were sown. Today, we’re also in a technology boom, with sky high valuations. But what’s changed is this time companies are making profits very quickly”
These two technology booms were highlighted by many of our interviewees. The past 20 years have seen plenty of crises, not least the global financial crisis and the Covid-19 pandemic, but the tech bubble was “by far the most interesting”, says Guy Foster, chief strategist at Brewin Dolphin.
“Maybe it was because it was my first major bear market, but also because it wasn’t like there was nowhere to hide. There were amazing opportunities, and people could make really good money, even while the rest of the market was going down.”
Although the impact on the stockmarket was “devastating”, there was “barely even a recession”, he recalls, and savvy investors were able to pick up high-quality stocks for a bargain.
Technology and the rise of the mega cap companies may have been the dominant sector for the past decade, but that does not mean the 2020s will follow the same trend, says Fahad Kamal, chief investment officer at Kleinwort Hambros. Indeed he points out that while each decade always has a standout theme that dominates returns, since the 1950s that theme has never occurred in two consecutive decades (see Fig 1).
Emerging market seesaw
“The last decade was all about the big techs, the mega caps,” he says. “But people forget the decade before was all about emerging markets and commodities. And then the subsequent 10 years have been awful for emerging markets.”
Looking forward, Mr Kamal thinks the next big thing will probably be responsible investing, but also expects emerging markets and commodities to make a comeback.
“Ten years ago they were very expensive, having come off an amazing decade. Everybody thought they were going to change the world. It was all about China. But today they have come off an awful decade and nobody wants to hold them. And so they’re cheap.”
There was a real sense of optimism surrounding emerging markets earlier this century, says Gary Greenberg, head of global emerging markets at Hermes, with a belief that most of these countries would eventually achieve developed market status. “But now it’s pretty clear that most of them won’t. It doesn’t look like Thailand is going to become the next Belgium.”
That does not mean there have not been successes, nor that there are no opportunities to be found. He points to China, “one scary mess” back in 2001, which has now brought perhaps half a billion people out of poverty. “It’s been a major miracle. Yes, they polluted the planet in the meantime, but huge numbers of human beings are much better off.”
India too has made great strides, as have Singapore, Hong Kong, Taiwan and Korea. But for others the outlook is much more sober, says Mr Greenberg, with the global financial crisis in 2008, and then the pandemic, having “stuck a really big spoke in the wheels of their development”.
Nevertheless, from an investment perspective, emerging markets still offer plenty of opportunities, he says. The quality of companies in some of these markets has improved considerably, and the advances we are seeing in AI, automation, healthcare and technology mean investors have a huge amount to choose from.
The same is true on the fixed income side, says Luc D’hooge, head of emerging markets bonds at Vontobel. Back in the 1990s the index was dominated by Latin America, but since then the universe has got much bigger, is much more diversified, the quality has improved and more indices have been launched.
Investor appetite for these bonds has increased significantly, with developed market bonds yielding much less than they once did, while the rise of exchange traded funds (ETFs) has provided low cost exposure to the asset class to a wider market.
“But emerging market bonds are still a very segmented area, and very far from an efficient market. So there are massive opportunities for active managers,” he says.
Thematics come of age
Identifying megatrends and the growing acceptance of them as a basis for investing has seen a huge increase in the idea of thematic investing in recent years. One of the pioneers of this approach was Pictet Asset Management, which launched its biotech fund back in 1995. Other strategies soon followed, such as the well-known water fund which launched in 2000.
“Back then, it wasn’t clear to us that this was a new discipline,” says Steve Freedman, head of research and sustainability, thematic equities, at Pictet Asset Management. “We didn’t say: ‘That sounds like a good idea. Let’s start a portfolio.’ But then some of these additional ideas emerged and we began to group them together more as an offering.”
Pictet now offers 15 thematic funds, and while for many years inflows were gradual, the firm reports that in the past few years it has been much more impressive. “At the end of 2018, we were at $32bn. And as of the end of October 2021, we were at $86bn,” he reports.
This has been driven, at least in part, by the rise of environmental, social and governance (ESG) considerations when it comes to investing, while the long range focus of the megatrends has provided a level of comfort to those concerned by the volatility caused by the pandemic.
Pictet’s funds which possess an environmental angle have proved particularly popular, reports Mr Freedman – the global environmental opportunities strategy for example went from less than $1bn in 2018 and has now passed $10bn. “We are starting to see a bit of a focus on the social angle, but that is trickier to do. But we have some strategies where we’re seeing the interest grow; for example, our nutrition fund has picked up quite a bit,” he adds.
Pictet may have been a pioneer in this area, but the marketplace has become much more crowed in recent years – hardly surprising given the investor appetite. This has come from both the big fund houses and smaller boutique players.
“Going forward, I think you probably will see some consolidation in the industry. Some of the new players are doing a good job, but others may find thematics do not play to their competitive advantage and may prefer to focus on something else,” says Mr Freedman.
Passives power ahead
The rise of passive investing, and in particular ETFs, has been a huge trend in the past decade. As the tables to the right show, this is an area dominated by the big fund houses, in particular BlackRock and its iShares ETF brand, which it aquired in 2009, and which has retained a huge lead over its competitors.
Since 2010, there has been a significant shift of capital from active to passively managed funds with more than $900bn moving from the former into the latter, says Nick Hutton, head of UK iShares & Wealth at BlackRock. “The rise of ETFs is one of the most significant trends of the last 20 years, with global assets growing from $1tn to $8tn in the last decade,” he explains.
Mutual funds and ETFs have helped to democratise investing, claims Mr Hutton, providing investors with a significantly wider universe of investment opportunities.
“Indexing has shown that investing doesn’t need to be complex, or exclusive, and has helped millions of people build savings that serve them throughout their lives,” he says. “ETFs have coupled the simplicity of diversified investments with the benefits of transparency to allow all investors, retail and institutional, greater access to global markets.”
However, despite considerable growth, ETF penetration of the total equity and bond market and by client segment remains low and Mr Hutton believes there are decades of growth ahead.
“We expect generational shifts to unlock further growth and global ETF AuM to hit $15tn by 2025,” he says.
A big part of the attraction of these products is the low cost. “In the past 20 years, there has been a growing recognition that costs are important in investment management, and that people are voting with their feet on finding lower cost products,” says Sean Hagerty, head of Europe at Vanguard, the second largest provider of passive funds in 2021.
The firm believes in keeping costs low in both active and passive strategies, he says. “We think the biggest reason why active managers don’t perform well is because of costs. That’s what the data would tell you, that’s the single largest detractor from them from their ability to generate alpha.”
But the purest form of low cost comes in the form of indexing, says Mr Hagerty, and in many parts of the world that has meant the relentless rise of ETFs. This does vary from market to market though, he reports. For example, the UK is lagging behind other parts of Europe because many of the legacy platforms were set up to trade funds and are not easily able to offer ETFs, whereas the infrastructure on the continent makes them much more accessible to investors there.
ETFs are not all about costs though, he insists, with the wrapper offering myriad other benefits such the ability to trade them as well as tax benefits in certain jurisdictions, while their simplicity has enabled investors to build truly diversified portfolios.
Looking forward, he comes back to the importance of technology in the investment landscape, and marries that to the need to keep costs low. “Technology is now enabling a significant reduction in the barriers to offering high quality advice, which we think will be the next frontier,” says Mr Hagerty.
Vanguard recently launched an advice service in the UK and is soon to do the same in Germany, though he is keen to point out this is not robo-advisory.
“We don’t necessarily believe robo will be the next big thing, rather we think advisers enabled by technology will be the next big thing. We think that you can combine advice with an asset management platform for under 100 basis points. And that will help in our mission to try and get investors into the market and have them achieve some level of investment success.”
